Most security regulation schemes require a security issuer to complete a complicated and often extremely expensive registration and disclosure process before offering securities to the public. In many jurisdictions, however, an issuer may take advantage of less stringent registration and disclosure requirements by offering securities only to a limited and/or select group of investors, for example, investors with a high net worth and/or a high level of financial sophistication. An offering targeting limited and/or select groups of investors is often referred to as a private placement.
Although an issuer conducting a private placement is excused from certain registration and disclosure requirements, other complications arise. For example, in the United States and many other jurisdictions, the issuer must distribute and process subscription documents to and from an investor and determine that the investor is a member of the limited and/or select group before allowing the investor to subscribe to the private placement. It can be appreciated that the cost of sending, receiving, and processing paper subscription documents may be substantial. In addition, regulations require the issuer to carefully track each copy of a prospectus or other document sent to an investor. Tracking paper copies of prospectuses creates additional overhead expense.